CLASSIFICATION OF AUDIT

On the basis of the organizations, audit may be

classified into
1. Statutory Audit 2. Government Audit 3. Private
Audit

1. Statutory Audit or compulsory Audit

It refers to the Audit of accounts of a business
enterprise carried out compulsorily under the provisions
of a statute or law.
Features:
a) Statutory Audit is compulsorily under law.
b) Where Statutory Audit has been prescribed by law
the owners of the enterprise cannot make it optional.
c) Statutory Audit is required to be conducted by a
qualified auditor.
d) In the case of Statutory Audit, the auditor is a
representative of the owners of the enterprise. So, he is
required to serve the interests of the owners, and not the
interests of the managers.
e) Statutory Audit is an independent audit.
f) Statutory Audit is an external Audit.
g) Statutory Audit must be a complete audit, it cannot
be partial.

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Advantages:
1. In case of joint stock Company, the Statutory Audit
enables the share holders to know the truth and
fairness of the accounts or representations made by
the managements in the financial statements
regarding the results of the business operations.
2. In case of a trust, the Statutory Audit protects the
interests of the beneficiaries against the possible
fraud by the trustees, and also protects the interests
of the trustees who may not possess adequate
knowledge of the principles of accounting.
3. In the case of a co-operative society-
i) It helps in the proper maintenance of books of
accounts
ii) It acts as a check against frauds by the managing
committee.
iii) It protects the members of the managing
committee against the baseless criticisms.

Organizations where Statutory Audit can be carried

out:
a) Joint stock companies governed by the Companies
Act, 1956

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 b)Banking companies governed by the Banking
regulation Act,1949
c) Insurance companies governed by the Insurance
Act,1938
d)Electricity supply companies governed by the
Electricity supply Act,1948
e) Cooperative societies registered under the
Cooperative societies Act, 1912
f) Public and charitable trusts registered under
Religious and Endowment Acts
2. Government Audit:
Government Audit refers to the Audit of accounts of
government departments and offices, government
companies and statutory or public corporations.
Features:
1) Government Audit is provided for by law.
2) Government Audit is conducted either by the
Comptroller and Auditor General of India and his
staff or by professional chartered accountants
approved by the Comptroller and Auditor General of
India.
3. A Government Audit is internal.
4. Government Audit is a continuous Audit. It is
conducted continuously, as a very large number of
transactions are involved.

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Objectives:
1. To ensure that the Payment has been sanctioned by
the competent Authorities.
2. To ensure that every Payment is made as per rules
and regulations.
3. To see that the expenditure is incurred by the right
person.
4. To see that the payments have been made to the
right persons.
5. To ensure that the expenditure is not excessive.
6. To ensure that the expenditure has been incurred in
the public interest.
7. To check the system of granting allowances to
employees, such as T.A, D.A. etc. to ensure that
they have been granted under the rules framed for
that purpose.
8. To see that the payments are properly classified as
capital and revenue.
9. To ensure that a proper system of stock taking has
been adopted.
10. To make suggestions to the proper Authority
for improvements in the rules and regulations for
greater efficiency and economy.

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 3.PRIVATE AUDIT OR VOLUNTARY AUDIT
Where audit is not compulsory under any statute, but is
undertaken by the owners voluntarily to get the benefits of audit
is called private audit.
Features of private audit:
1. Private audit is not insisted upon by any law of the country.
2. Every private audit is generally carried on by qualified
professional auditors.
3. In the case of private audit, the nature and scope of audit is
determined by the owners of the business.
The organizations which adopt private audit or the various
forms of private audit are-
1. Sole trading concerns.
2. Partnership firms
3. Other individuals and Institutions.

From the point of view of degree of independence of the

auditor, audit may be classified into two classes viz, 1. Internal
audit and 2. External audit.
1. Internal audit:
According to Walter “Internal auditing consists of a continuous,
critical review of financial and operating activities by a staff of
auditors functioning as full time salaried employees”.

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 So it is the auditing for the management conducted by the staff
specially appointed for the purpose to ensure that the work of
the concern is going on smoothly, efficiently and economically.
Features of Internal Audit:
1. Internal audit is, generally, undertaken by concerns which are
large in size.
2. It is not compulsory. It is purely optional or voluntary.
3. Internal audit is carried on continuously throughout the year.
4. Internal audit is, usually, conducted by the staff or employees of
the concern, specially appointed for the purpose.
5. The staff engaged in internal audit is appointed by the
management, and so, they are responsible to the management.
6. Internal audit is an integral part of internal control.
7. Internal audit is conducted to ascertain whether an effective
internal control system exists to prevent errors and frauds.
Objectives of Internal Audit:
1. To ascertain whether the internal check and accounting systems
are adequate and effective.
2. To ascertain whether the pre-determined policies, plans and
procedures have been compiled with.
3. To ascertain the reliability of the accounting and other data
compiled within the organization.
4. To evaluate the performance of the personnel who are entrusted
with certain responsibilities.
5. To ascertain whether the properties of the concern are
safeguarded.
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6. To suggest to the management the improvements desired in the
internal check system, accounting system etc.

Advantages:
1. It is helpful to the management to ascertain whether the internal
check and accounting systems are adequate and effective to
prevent errors and frauds.
2. It helps the management to ascertain whether the pre-
determined policies, plans and procedures have been compiled
with.
3. It is helpful to ascertain the reliability of the accounting and
other data compiled within the organization.
4. It is helpful to evaluate the performance of the personnel who
are entrusted with certain responsibilities.
5. It helps to ascertain whether the properties of the concern are
safeguarded.
Disadvantages:
1. Internal audit does not seek to safeguard the interests of the
owners of the business and the outsiders who deal with the
business.
2. The quality of internal audit is wholly dependent on the
management.
3. Internal audit is, generally, conducted by the staff of the
organization who may not be as qualified and skilled as
independent auditors.
4. Internal audit is not obligatory. It is purely optional.
2. Independent Audit or External audit:

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 Independent audit refers to the audit of an organization
undertaken independently by a qualified auditor.
It is the audit of an organization undertaken by a professionally
qualified auditor, who is independent of the o
rganization hiring his service for the purpose of audit. The main
objective of independent audit is to render an opinion as to
whether financial statements have been prepared in conformity
with the generally accepted accounting principles and legal
requirements, and whether the financial statements give a true
and fair view of the profits and the financial position of the
enterprise.
Differences between Independent or External Audit and
Internal Audit:
1. Independent audit is conducted by independent professionally
qualified accountants, whereas internal audit is, generally,
conducted by the staff of the organization.
2. Independent audit is carried out periodically, usually once in a
year. But internal audit is carried out continuously throughout
the year.
3. Detection and prevention of frauds is only an internal objective
of Independent audit, whereas detection and prevention of
frauds is one of the main objectives of internal audit.
4. Internal audit fulfills the needs of the owners as well as the third
party for reliable financial data, whereas internal audit fulfils
the needs of only the management.

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5. In the case of Independent audit, the scope of audit work is
determined by the statute. But in the case of internal audit, the
scope of audit work is determined by the management.
6. In the case of Independent audit, the audit examination is not
detailed. Generally, the test check techniques are employed. On
the other hand, in the case of internal audit, the audit
examination is quite detailed.
7. An independent auditor cannot be easily removed. But the
services of an internal auditor can be easily terminated by the
management.
8. The duties of an independent auditor cannot be modified or
reduced. But the duties of an internal auditor can be modified
by the management.
9. An independent auditor gets fees for his work, whereas as
internal auditor gets regular salary for his work.
10. The remuneration of an independent auditor is fixed by the
shareholders or the owners. But the remuneration of an internal
auditor is fixed by the management.
11. An independent auditor is responsible to the owners as well
as to the outsiders, whereas an internal auditor is responsible
only to the management, and not to the outsiders.
12. An independent auditor is requires to submit his audit report
to the shareholders or owners. But an internal auditor is not
required to submit any audit report.

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 On the basis of the method or approach to audit work or on
the basis of the conduct of audit, audit may be classified into
1. Continuous audit and 2. Annual audit
1. Continuous Audit or detailed Audit:
According to R.C.Williams, “A continuous audit is one where
the auditor or his staff is constantly engaged in checking the
accounts during the whole period or where the auditor or his
staff attends at regular or irregular intervals during the period”
In the words of J.R. Botliboi, “A continuous audit involves a
detailed examination of all the transactions by the auditor
attending at regular intervals, say, weekly, fortnightly or
monthly, during the whole period of trading”
So continuous audit is an audit which involves a detailed
checking of all the books of accounts of the business
continuously throughout the year, and the profit and loss
account and the balance sheet of the business at the end of the
year.
Continuous audit is suitable for the following types of
businesses:
1. In concerns like banks, railways etc, where the final accounts
are desired to be presented soon after the close of the financial
year.
2. In big concerns where the volume of transactions is very large

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3. In concerns where the system of internal check is not
satisfactory.
4. In concerns where the financial returns are required to be
presented to the management at regular intervals, say, at the end
of every month or quarter.
Advantages of continuous audit:
1. Audit is carried out throughout the year. As such, there is
sufficient time for detailed checking of all the books of
accounts.
2. The auditor checks the accounts in a detailed manner. This
facilitates detection and rectification of errors easily and
quickly.
3. The continuous presence of the auditor throughout the year
imposes a moral check on the staff of the client, and thereby,
reduces the scope for frauds.
4. Frequent visits of the auditor to the client’s business makes the
accounting staff of the client to be regular and forces them to
keep the books of accounts up to data.
5. It becomes possible for the business to place the audited balance
sheet and profit and loss account before the shareholders or
owners immediately after the close of the accounting year.
6. Because of continuous audit, the owners of a business can get
any desired information duly verified at any time without
difficulty.

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7. When there is a continuous audit, interim statements, if required
can be prepared easily.
Disadvantages:
1. Continuous audit involves much time.
2. Continuous Audit is very expensive, as more audit fees are
required to be paid to the auditor for his continuous attendance
or frequent visits.
3. The figures in the books of accounts, which have already been
checked by the auditor at his previous visit, may be altered
fraudulently by dishonest employees of the client.
4. If proper notes of the work done on previous visit are not made
by the auditor, some of the items may be omitted to be
examined.
5. Frequent and unexpected visits of the auditor to the clients’
business, involved in continuous audit, may cause
inconvenience to the client’s staff and dislocation in the client’s
work.
6. Frequent visits by the auditor’s staff to the client’s business,
involved in a continuous audit, may lead to close and friendly
relations between the staff of the client and the staff of the
auditor.
2. Final Audit, Annual Audit or Periodical Audit:
In the words of De Paula “A periodical audit is one where the
auditor does not attend until the completion and closure of the

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 financial accounts by the client, and the auditor takes the audit
task as a whole and the checking is done at one time”
In the words of J.R. Botliboi, “A periodical audit or balance
sheet audit is one where the auditor attends only at the end of
the financial period, and certifies the final statement of accounts
after scrutinizing the same with the books of accounts, vouchers
and documents”.
From the above definitions, it is clear that final audit is an audit
where the auditor takes up his work of checking the books of
accounts and other records only at the end of the accounting
year when the transactions for the whole year completely
recorded, balanced and a profit and loss account and balance
sheet have been prepared, and carries on his audit work till it is
completed.
Characteristics of final Audit:
1. The audit work is, generally, started after the close of the
financial year.
2. Audit work starts after the accounting work is over.
3. The auditor visits the client’s business only once in a year after
the accounts are closed and carries on the audit work till it is
completed in one sitting.
4. It is popular, particularly in small concerns.
Advantages of final Audit:

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1. The cost of final audit is less than that of continuous audit. So it
is suitable for small concerns.
2. The audit work can be completed easily and within a reasonable
time, as it is completed in one sitting.
3. As the auditor commences his audit work only after the books
of accounts have been closed for the financial year, the work of
the auditor does not cause any dislocation in the work of the
client’s staff.
4. As the auditor has the books of accounts immediately after the
close of the books, he can plan the whole work in such a way
that there is no possibility of alteration of any entry by the
client’s staff.
5. Final audit is convenient for the auditor, as he need not maintain
a large staff.
6. In the case of final audit, the audit work does not become
mechanical and monotonous.

Disadvantages of final Audit:

1. As the checking of accounts by the auditor undertaken only
after the close of the accounting year, the staffs of the client
have sufficient time to use their ingenuity to adjust or
manipulate the accounts.
2. In the case of final audit, the errors and frauds are found only
after the close of the accounting year.
3. Final audit is only post-mortem examination of the accounts.
The auditor detects the errors and frauds much after they have
been committed.
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4. The auditor will be left with very little time for detailed
checking of accounts, as the audit work is to be completed in a
short time.
5. The auditor depends much on test checking. As a result, errors
and frauds can exist even after the accounts have been audited.
6. The audit of accounts begins only after the close of the financial
year.
7. Final audit is not effective in imposing a moral check on the
client’s staff.
8. It is not suitable for large organizations where the transactions
are numerous and complex.
9. Periodical audit does not help in the preparation of interim
accounts and the declaration of interim dividend.
AUDIT PROGRAMME
Before commencing an audit work, an auditor, generally, pre-
plans his audit work carefully, and prepares an audit programme
to carry out his audit work efficiently.
In the words of Montgomery, “An audit programme is a list,
generally in detail, of steps to be performed in the course of an
examination. It controls the nature and extent of examination,
aids in arranging, timing and distributing the work, guards
against possible omissions and duplications and provides part of
evidence of work done”
According to Prof. Meigs, “An audit programme is detailed
plans of the auditing work to be prepared, specifying the
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 procedures to be followed in verification of each item in the
financial statements and giving the estimated time required”.
So an audit programme is the auditor’s plan of action,
specifying the work to be done, the procedures to be followed
for doing the work, the persons responsible for the completion
of the work and duration of time within which the work has to
be completed.
Features of an Audit programme:
1. An audit programme should be drawn up by the auditor himself.
2. It should be prepared before the commencement of the audit.
3. A separate audit programme should be drawn up for every
individual audit, because, in no two audits, the audit work is
identical.
4. It should be always in writing
5. It should contain the full details and procedures of the audit
work to be conducted.
6. It should indicate the distribution of the work among the audit
staff.
7. It should specify the duration of time within which the audit
work should be completed.
8. It should be flexible.
Objectives of Audit programme:
1. To ensure that no part of the audit work has been omitted.
2. To provide clear instructions to the audit staff.
3. To ensure proper distribution of work among the audit staff.
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4. To facilitate the conduct of the audit work by several audit
assistants simultaneously.
5. To identify the audit assistants responsible for each part of audit
work and to fix up their responsibility for omissions and
commissions.
6. To enable the auditor to have proper control over the whole
audit work.
7. To assess the cost of audit.
Advantages of audit programme:
1. Audit work can be started immediately in a systematic manner.
2. Audit programme ensures that each part of audit work is
completed, and nothing is omitted.
3. It provides guidelines to the audit staff for the performance of
the audit work allotted to them.
4. It facilitates the conduct of audit work by several audit
assistants simultaneously.
5. It fixes up responsibility among the audit staff for any omission
or commission.
6. It helps the auditor to watch the progress made by the audit staff
in the audit work.
7. It facilitates continuity in the audit work.
8. It helps to complete the audit within the scheduled time.
9. It serves as an evidence of work done by the auditor.
10. It brings about uniformity in audit work from year to year.
Disadvantages of audit programme:

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1. Audit programme makes audit assistants specialized only in
their respective works.
2. It discourages the initiative and interest of the efficient audit
staff.
3. As the audit programme fixes a time for the completion of the
audit work, the work may be hurried up by the audit staff.
4. Audit programme may increase the work of the auditor and the
cost of audit work.
5. There is a danger that the same audit programme may be
followed from year to year without any alterations.
6. There cannot be a uniform audit programme that can be adopted
for all business concerns.
AUDIT NOTE BOOK
An audit note book(also known as audit memoranda) “is a book,
register or diary maintained by the audit staff during the course
of the audit, the points to be discussed with the senior audit
clerk or auditor, the points which require further clarification,
explanations and investigation and also the enquiries made and
the replies received thereto”.
A separate audit note book is maintained for each concern for
each year; it is a part of the permanent record of audit office.
Contents of audit note book
Generally, an audit note book contains the following points:
1. Nature of the business.
2. Organization structure of the firm.

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3. Names of principal officers, their powers, duties and
responsibilities.
4. List of books of accounts maintained by the business.
5. The systems of internal check and internal audit in force in
business.
6. The system of accounting.
7. Technical details and terms used in business.
8. Queries made and replies received.
9. Dates of commencement and completion of audit.
10. Progress of audit work.
11. Suggestions made by the audit staff.
12. Particulars of errors and frauds discovered.
13. Points to be included in the audit report
14. A copy of the audit programme.
Advantages of audit note book:
1. It helps the auditor to have a record of important points which
arise during the course of audit.
2. It is helpful in the preparation of audit report
3. It is helpful in assessing the efficiency, ability and sincerity of
the audit staff.
4. It can be serving as evidence in the court of law.
5. It is helpful to the auditor to a great extent in future, especially
in the subsequent audits of the same concern
Disadvantages of Audit Note book

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 1. If the audit note book is not prepared carefully and properly,
it can be used in a court of law as an evidence of negligence on
the part of the auditor.
2. It promotes a fault finding attitude in the minds of the audit
staff.
3. It may create misunderstanding between the staff of the client
and the audit staff.

Audit working papers:

In the words of Arnold. W. Johnson, “Audit working papers are
the written private materials which an auditor prepares for each
audit. They describe the accounting information which he has
received from his client, the methods of examination used, his
conclusions and financial statements”.
So audit working papers refers to the file of analysis,
summaries, comments and correspondence built by an auditor
during the course of the full work of an audit engagement.
Advantages of the Audit working papers:
1. The working papers provide an evidence to prove the work
carried out by the auditor and to establish the opinion made by
the auditor.
2. They will be very useful to the auditor as documentary evidence
of work done.
3. With the help of the working papers, the auditor can coordinate
and control the audit work in a better manner.
4. They serve as the basis for the evaluation of the audit staff.

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5. They serve as a connecting link between original documents
and financial statements.
6. They help the auditor to prepare his audit report easily.
7. The working papers provide a training ground to the audit staff
as to how to make the summary of the work done by them.
8. In case of frequent changes of audit staff, the working papers
are of great help to the new staff to complete the work.
AUDIT FILE:
As an auditor is often engaged in a number of audits
simultaneously, he usually keeps the records of each audit in a
separate file for ready reference. Such a file is called audit file.
There are two types of files. They are-
1. Permanent file: Permanent file contains those working
papers which are useful for conducting the audit examination
year after year. It contains information about the client which
will not change from the year to year.
2. Current file: Current file contains only those details which
have a bearing on the current audit. It contains only those
papers and information obtained during the current audit.

INTERNAL CHECK
In the words of D. Paula, “ Internal check means practically a
continuous internal audit carried on by the staff itself, by means
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 of which the work of each individual is independently checked
by another members of the staff”.
According to W.Johnson, “ Internal check as one wherein the
accounting work of one employee is complemented and verified
by the work of another employee, both employees working
independently and without duplication of each other’s work”.
L.R Dicksee defines Internal check as, “ Such an arrangement
of book-keeping routine that errors and frauds are automatically
prevented or discovered by the very operation of the book-
keeping itself”.
So it is clear that Internal check is the organization of the
accounting system of a concern in such a way that no one
person singly handles a transactions from the beginning to the
end, and the work of one person is automatically checked by
another with a view to prevent errors, frauds and irregularities,
and to detect errors and frauds, if they have been committed.
Features of Internal check:
1. Each staff members are assigned a specific duty.
2. The work is assigned to the staff members according to their
qualifications, area of specialization, training, ability etc.
3. No one person is allowed to do any single task from the
beginning to the end.
4. Though each staff member is held liable for any error or
irregularity in the task assigned to him.

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5. There is no duplication of work in the process of independent
checking.
Objectives of Internal Check:
1. Proper division of work among staff-is aimed at for the
following purpose:
a) to allocate the duties and responsibilities among the staff in
such a way that each staff member could be held responsible for
a particular error or fraud.
b) To ensure proper staff development trough appropriate and
timely change of work.
c) To increase the efficiency of the staff members.
2. Minimisation of errors and frauds: Errors and frauds are sought
to be minimized-
a) By ensuring that no one person does any single task from the
beginning to the end.
b) By ensuring that the work done by each staff member is
independently and automatically checked by another staff
member in the ordinary course of business.
c) By making each staff member liable for any error or
irregularity in the task assigned to him.
d) By exercising moral pressure over the staff members.

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3. Early detection of errors and frauds:- This is possible ensuring
that no one person does any single task from the beginning to
the end.
4. To ensure the reliability of accounts by seeing that no business
transactions are left unrecorded, all the transaction are recorded
accurately and the accounts are kept up to date.
5. Early preparation of final accounts.
6. Simplification of external auditor’s work.

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